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I've read that, in 1938, economic crisis was taking back, and that it's the war effort that finally closed the 1929 crisis.

Is it not a version of the parable of the broken window ? How a war effort could be good for the economy ? (because, as the parable says, spending money in war is the same for the GDP than spending money in other things, but the last is better for the welfare of people)

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Is this a homework assignment? It's the first time I hear of the parable of the broken window: could you please identify some source for it? Thx. –  Drux May 19 '13 at 20:03
It's not a homework assignment. You can find further information on en.wikipedia.org/wiki/Parable_of_the_broken_window. –  Arnaud May 19 '13 at 20:21
Broken window parable has recently become popular in part because of the implications for technical debt and cyber security –  Mark C. Wallace May 20 '13 at 11:19

3 Answers 3

up vote 8 down vote accepted

I'm afraid that I must disagree with @Samuel Russell. Yes, war spending is a case of the broken window fallacy, and I'm inclined to believe that Bastiat is both clearer and more correct than Mr. Russell gives credit. I suspect that I'd like to sit down with Mr. Russell and puzzle out our disagreement over beer, but this is not the place for that discussion.

The Parable of the Broken Window states that not all spending is equally valuable to the economy. Spending that preserves the status quo (repairs to a broken window) or which is externally mandated (war spending), is less valuable than truly voluntary or discretionary spending, because truly voluntary spending transmits signals about the wants and desires of the consumer. Spending to preserve the status quo does not generate as much growth or innovation. (reductio ad absurdium, if all spending is directed to preserving the status quo, you can never ever create apple computer by spending on broken windows. New products require spending that is not restricted to preserving the status quo, and is not regulatory.)

The depression was not a broken window problem. The depression arose (again, grossly oversimplifying) because the economy was performing FAR under anyone's estimate of what was optimal. Consumer demand was low, which resulted in low production, which resulted in layoffs, which resulted in reduced consumer demand in a horrible spiral. If you want to force fit the broken window into the situation, the depression was because people chose not to replace the window, but just to close the shop.

In such a situation, government spending increases production, increased production increases hiring, increased hiring leads to increased demand. I believe the point that Mr. Russell makes well is that the war spending/government spending/mandatory spending is not tied to utility the same way that consumer demand is. For the duraqtion of the war, consumer spending is actually suppressed because of the proportion of production that is diverted from products with intrinsic utility (consumer demand, or "butter") to production of goods where the utility is externally mandated (Military production or "guns"). The surge in demand nevertheless causes a surge in production, which causes hiring, which raises wages, which reverses the downward spiral that transformed a recession into a depression.

This is a book length question - multiple books have been written about it. Many of them disagree, some with great vehemence. I've tried to limit this answer to be extremely brief, and to avoid some of the more controversial assertions. I've probably fallen short of the goal, but I hope I haven't stepped on too many toes.

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While I disagree with this answer, it is a good answer. Any debate required can be directed towards chat: chat.stackexchange.com/rooms/1560/the-time-machine –  Samuel Russell May 20 '13 at 0:52
Thank you for your answer. But if the government had spent money in another thing than war, like education, is that it would have also resolved the crisis ? If yes, it seems that it is a case of the parable of the broken window. If no, I think that this situation requires a more militarian specific explanation. –  Arnaud May 20 '13 at 8:47
@Arnaud - you're correct that in theory any government spending can stimulate, but I thought your question was whether in 1938 it was military spending that "closed the 1929 crisis". I'm not sure that any stimulus is = broken window parable; I've usually encountered broken window in the context of technical/societal debt. If the government had spent $$ on education on the grounds that the US education system was broken and needed fixing, that might fit the constraints, but that isn't history. –  Mark C. Wallace May 20 '13 at 11:16
Okay, all is clear now ! In fact, I've read something that made me think that it was specifically because of the military spendings that the economy has recovered. And you say that all spendings could have worked. (Sorry for my English, by the way) –  Arnaud May 20 '13 at 12:04
If you and Mr. Russell do ever "puzzle out your disagreement over beer", do take care that no windows get broken. :-) –  T.E.D. Jul 11 '13 at 19:31

Bastiat is wrong. Utilitarianism, the idea of subjective valorisations of utility as opposed to price, has been rejected because it is fundamentally incoherent: subjective utilities are incommensurable and thus unvalorisable. The reason for this is that the subjective process of desire is incommensurable between individuals. Even if we both price ice-cream purchases at 50c, the ice-cream gives me a lactose intolerance response but delights you. This is precisely why mainstream economics doesn't present a theory of value, but a theory of price. You can valorise subjective assessments of price based on the model's conception of a price optimising agent with needs.

The point of the broken window fallacy is that it outlines the limits of GDP. Repairing a broken window increases GDP (exchange values in circulation), but reduces actual use-values. One of the reactions of Marxist economists to Fordism was to hypothesise two more Departments of production—III (Waste) and IV (War)—in addition to I (Capital goods) and II (Consumption goods). The only difference with Departments III and IV is that the value doesn't circulate or become embodied in the satisfaction of the desires of labour or capital as such.

The central problem is your misunderstanding of the broken window fallacy: the market doesn't measure useful-values except to the extent they satisfy some need (window repair, murdering central europeans). Whether the "use-values" are deemed to be moral is beside the point, the presence of a use-value allows the commodity to bear and realise exchange-value. Heroin has a going price on the market, and the sale of heroin contributes to the gross product.

(There's a version amenable to mainstream economics of the above critique as well. It runs roughly the same: utilities are not prices.)

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It's interesting, thank you. Let me sure that I've well understood : for you, a war is as good for the GDP as spendings in other things, like education ? –  Arnaud May 20 '13 at 9:06
I think that you don't take into account the side effects of war : destructions that it caused are bad for the GDP ! (no ?) –  Arnaud May 20 '13 at 9:34
Are we talking about gross product, or are we talking about material damage. "Destructions" aren't removed from the gross product because they're not products. Assuming that economics represents anything other than its own model is dubious. GDP represents a specific way of looking at aggregate product: for the GDP war products and educational services products are identical. GDP doesn't discriminate between labour quality improvement and product designed for waste. –  Samuel Russell May 20 '13 at 20:30
It's true, thank you. –  Arnaud May 21 '13 at 5:50
Interesting debate although I had to reach for the dictionary 3 times during the first paragraph alone! –  user357320 Jul 11 '13 at 11:32

The major wars of the 20th century have certain things in common with the .COM boom and the so called 'space race', but are not comparable, in the same respect, to more historical armed conflicts - examples being the Gallic wars of Julius Caesar or, for example, the War of 1812.

The opening question is: what's the difference between building a house and launching a Mars expedition? When one builds a house, much of the infrastructure for construction and materials production is already in place: one has wood, concrete, plumbing, wiring, and appliances available at one's fingertips. The contractors are standing by with bulldozers, concrete trucks, nail guns, and pipe benders.

In comparison, the Mars expedition incurs a huge amount of trial and error improvisation all along the supply chain - one is building a lander, on-planet housing, water purification, food production technology, launch facilities, instrumentation, and so forth. Therefore one has to build infrastructure to build infrastructure. When one observes the progression of the US space program, one sees vast amounts of innovation in electronics, materials, life support, computation, facilities construction, 'food engineering', and so forth. The .COM boom required the production of vast quantities of routers, fiber, servers, network software, browser software, email servers, etc. These put an inordinate demand on the entire global workforce.

What one sees in WW I is innovation in submarines, aircraft, diesel engines, airships, and tanks, and in WW II innovation in nuclear physics, electronics, aircraft, submarines, radar, and codebreaking. This was not merely 'putting a lot of people to work' in factories, as well as on the front, it also demanded all out effort from academics, scientists, engineers, and designers. The distances involved, particularly in the Pacific theater, demanded a lot of work just to ship things around. Someone growing corn and raising chickens wasn't merely feeding troops, but merchant seamen, transport pilots, road builders, truck builders, and so forth.

WW II was a vast waste of human potential and treasure, however what was left over contributed significantly to the economic boom of the 1950s. One can see at least three influences: the first is the production resources created during the war, the second is the new technologies, and the third is the workforce that had learned how to make and operate all this new stuff.

Much of WW II was fought over enormous distances, and in certain respects this meant that a lot of the war effort was logistical rather than belligerent. The United States had to maintain supply lines to Britain, Australia, the Philippines, and China at various stages of the war, including transportation by sea and air. At the end of the war, much of this was immediately pressed into civilian service.

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